Tall order for Bill Shorten

the most important decision in
Julia Gillard
’s cabinet reshuffle – politically and economically – was the appointment of
Bill Shorten
as Minister for Employment and Workplace Relations.

Shorten – who is a potential replacement for Gillard if the government is still in an unwinnable position at the end of 2012 – is entrusted with ensuring the Prime Minister’s industrial relations reforms are a political asset in the 2013 election year.

This may not be as easy as
Kevin Rudd
’s political demolition of Work Choices had led the government to believe. Employers – including
Ted Evans
, the highly regarded former Treasury secretary and chairman of Westpac – complain about the impact of the Fair Work Act on productivity.

These complaints won’t go away. Critics of the Fair Work Act make a pretty persuasive case that the legislation is tilted towards a partial restoration of the role of arbitration.

That is of course hardly surprising: restoring the position of the unions was a key objective of the Fair Work Act, and arbitration had been a central pillar of the unions’ strength.

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But the slowing global economy and the easing terms of trade will put the spotlight back on productivity growth as a primary source of rising incomes.

At the same time, the structural change unleashed by the mining boom has a long way to go. Manufacturers and service industries such as tourism and retailing will come under pressure from the continuing investment boom in the resources sector.

The mining boom is putting pressure on many industries, but these industries are under intense pressure because they are trade exposed or labour intensive or both. Increased productivity growth probably is their best hope.

In the meantime, the claims and counter-claims about inflexibility could be tested in the coming months as school-leavers spill into the labour market.

The industrial relations system will be at the centre of the economic debate.

While the industrial relations debate is renowned for its hyperbole, the Productivity Commission has published a sober and, for the government, sobering discussion of the potential difficulties of the IR system for the retail sector, which is the largest private sector employer.

Australian retailers have far lower labour productivity than their American and European counterparts.

As a result, labour costs in Australia are relatively high. This is mainly the result of economies of scale, especially of the American “big box" retailers.

But with economies of scale limited by the size of the Australian market and other barriers to the entry of big-box retailing, the flexibility of industrial relations becomes all the more crucial.

According to the Productivity Commission, employers complain that the increases in penalty rates as a result of award modernisation have limited their ability to trade profitably at the times when many consumers prefer to shop. High minimum award wages also restrict their ability to introduce performance-related commissions and other incentive payments.

The rule that “every worker must be better off overall" also increases the cost and complexity of negotiating enterprise agreements, making productivity improvements more difficult to achieve.

And of course, the famous award requirement that casuals be engaged for no less than three hours also has limited flexibility.

For their part, the unions claim there is unused flexibility in the industrial relations system, and no doubt there is fault on all sides. The challenge for Shorten is to get better results.

“If those sectors of the Australian retail industry now exposed to international competition are to have the best chance of competing effectively, the productivity of workers will need to substantially narrow the gap with international competitors and more than keep pace with future wage movements," the commission says.

As Workplace Relations Minister, Shorten will be responsible for the review next year of the Fair Work Act.

The Productivity Commission says the review should be comprehensive, transparent and independent, and take enough time to receive and consider input from all stakeholders.

Unsurprisingly, Shorten did not instantly embrace the commission’s recommendation. But like Bob Hawke, Shorten must make the transition from union to national leadership.

A review of the kind proposed by the Productivity Commission could give Shorten the leverage he needs over his ministerial colleagues, the unions and employers to produce the productivity, income, and employment gains they all want.